Australian Central Bank Holds Rates Steady

By Reuters

March 4, 2014

SYDNEY, Australia — Australia’s central bank kept interest rates at record lows on Tuesday and said the outlook was for more of the same, citing signs that past cuts were working to lift housing and consumption.

The Reserve Bank of Australia acknowledged that the transition away from mining investment was proving difficult and that unemployment could still rise. But it also saw reason for optimism.

“Recent information suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction,” the central bank’s governor, Glenn Stevens, said in a brief statement after the bank’s March policy meeting.

“Some indicators of business conditions and confidence have shown improvement, and exports are rising.” he added. “Over time, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate.”

The decision comes a day before the resource-rich country is expected to report that economic growth remained subpar last quarter, though that would still extend a remarkable run of 22 years without a recession.

The central bank was considered almost certain to hold rates at 2.5 percent, where they have been since a cut last August. Just a month ago, the bank all but closed the door on further easing, saying evidence of a pickup in housing, consumption and inflation argued for a period of steady policy.

A Reuters poll of 19 economists had found that all expected rates to hold but were divided on the direction of the next move, with five predicting a cut and 13 looking for an increase.

The market reaction was thus muted, though the local dollar fell slightly to 0.8920 against the American dollar when Stevens noted that it was still high by historical standards.

There was more evidence of the stimulatory effect of low rates on Tuesday as data showed approvals to build new homes rose 6.8 percent in January to their highest in over a decade. Approvals were up almost 35 percent on the same period last year.

Matthew Hassan, an economist at Westpac, noted that approvals were running at an annual pace of 210,000, the second highest on record and well above estimates of underlying demand of around 172,000 a year.

“So new construction will finally start to redress the chronic shortfall of housing stock that has emerged over the last decade,” he said. “New dwelling investment may be set for strong double-digit annual growth in 2014.”

Figures for gross domestic product are due out on Wednesday, with a growth rate of 0.7 percent expected in the fourth quarter of last year, compared with the previous quarter. Growth for the year is seen picking up to 2.6 percent, from 2.3 percent, thanks chiefly to strength in exports as the mountain of money spent on mines lifts production.

The Australian Bureau of Statistics estimates that the country ran its first trade surplus in almost two years last quarter, while net exports added 0.6 percentage points to growth.

A lot of this output is headed for China, which has a seemingly inexhaustible appetite for resources. Goods exports to China hit a record 27.2 billion Australian dollars, or $24.3 billion, in the fourth quarter of last year, an increase of 45 percent over the same period in 2012.